The Simple Math Behind Real Estate Investment Properties

Today we’re going to go over the simple math behind real estate investment properties. Specifically, I’m talking about finding out if your real estate investment property is going to produce money at the end of the month (positive cashflow) or if you’re going to have to sink in a few hundred dollars to cover the costs.

 

There are only a few variables you need to know to figure out if your Toronto real estate investment is going to cashflow. Now please keep in mind that these are rough numbers. It is the best case scenario. You will never be able to hit these numbers because you will have vacancy, repairs & maintenance etc. We all think there won’t be too many repairs or that the appliances won’t break. But trust me. They do.

Here are the variables you need to know to figure out the simple math behind your real estate investment properties:

-Mortgage Payment
-Property Taxes
-Property Insurance

Optional
-Utilities (Add them in if
-Condo Fees (if your investment is a condo)

 

Here are a few examples:

Property In Barrie:
Purchase Price: 320,000
Mortgage Payment: $1,000 per Month (20% down, 30 year Amortization)
Rent: $1550 Per Month
Property Taxes: $2,900 Per Year ( $240 / Month)
Insurance: $900 Per Year ($75 / Month)
Tenants pay all utilities

Cashflow every month: 1550 – 1000 – 240 – 75 = $235
Therefore you are putting $235 into your pocket each month. You are technically also making more than that because close to half of your mortgage payment is principle (at today’s interest rates). This would be a yes in my books. It is very hard to find a property that creates positive cashflow with only 1 set of tenants in it. But be aware that is is your BEST CASE SCENARIO. It will take you a month or 2 to rent it, there will be maintenance fees, appliances that break down etc. When you start out you think “I’m sure it won’t be too bad”. But what can go wrong will go wrong. Even if your costs zero out at the end of the year because of all the extra fees, you are still making money by appreciation and debt paydown. If you get this opportunity, take it.

 

Here is another example where I have 2 tenants in the house (basement apartment):

Real Estate Investment Property in Oshawa:
Purchase Price: 420,000
Mortgage Payment: $1,300 (20% down, 30 year amortization)
Rent: $2500 ($1000 down, $1500 Up)
Property Taxes: $3,800 (320 / Month)
Insurance: $1,000 (80 / Month)
Tenants pay all utilities

Cashflow every month: 2500 – 1300 – 320 – 80 = $800
You are making $800 every month. That is a nice chunk of change. It will give you a lot of room for repairs, maintenance and vacancy. Note that for both properties I had a 30 year amortization on my mortgage payment. This helps cashflow drastically. You might not be able to do so all the time depending on your bank/financial situation. The standard length for a mortgage is 25 years. be aware that splitting the units involves more work. There are noise issues, air conditioning and heating arguments etc. Units with only 1 tenant are much less work.

 

The above two breakdowns are  great examples of real estate investment properties. You will notice that they are both about 45 minutes to an hour away from Toronto. It would be really tough to create positive cashflow on a Toronto real estate investment property. You will be sinking hundreds of dollars each month in hopes that the property will appreciate in value. There is nothing wrong with is if you are willing to risk it. During this current red hot market (currently March 2017 as of writing this), people in Toronto are making 500,000 a year speculating on knockdown bungalows. More risk brings more reward. If they get stuck holding the bag once the market turns, they are in big trouble. Here is an example in Toronto:

Real estate investment property in Toronto:
Purchase Price: 2,000,000
Mortgage Payment: $6,300 (20% down, 30 years amortization)
Rent: $2,000 Per Month
Property Taxes: $5,500 Per Year (460 / Month)
Insurance: $1500 (125 / month)
Tenants pay all utilities

Cashflow every month: 2000 – 6300 – 460 – 125 = -$4,885
That is a tough pill to swallow. The returns are enormous if you get out at the right time. But nobody can time the market. Slow and steady wins the race. 

 

As always please reach out with questions or if you are looking to purchase a real estate investment property. You can find me on live chat during most hours at the bottom right corner of the screen. If not, shoot me a text, e-mail or give me a call. 

 

Andre Pasche
647-918-5375
[email protected]

Norman Hill Realty Inc
20 Cachet Woods Court #2
Markham, Ontario
L6C 3G1